What it means
Over-the-counter markets sort companies into tiers according to how much information they publish and what standards they meet. OTCQB occupies the middle position, intended for businesses that are still growing and not yet ready for a major exchange.
Being quoted there shows that a company has at least met some conditions. To qualify, a company is generally required to be current in its financial reporting, to meet a minimum bid price test, to pay an annual fee and to confirm its details every year.
It must also not be in bankruptcy. These requirements remove many of the weakest companies that appear on the open tier, which improves the quality of the information available to investors.
For a young company, the tier is a practical way to give shareholders a place to trade without the cost of a national exchange listing. The cost of compliance is lower, and the reporting discipline can prepare a company for a later move to a larger market.
Some companies use OTCQB as a stepping stone while they build revenue and track record. Investors should still be cautious.
The companies are typically small, loss-making or recently formed, and their shares can be thinly traded with wide spreads. A higher tier means more information, not a guarantee of success.
For a finance team considering the tier, the main costs are the fee, the cost of keeping accounts and filings up to date, and the time of management. The benefits are visibility, a trading market for shareholders and, sometimes, better access to funding.
These need to be weighed up honestly against the cost. For a company, the choice between tiers is partly about cost and partly about signalling.
Quotation on a higher tier tells investors, lenders and potential partners that the company is willing to be examined. That message can be worth more than the direct benefit of trading in the shares.
In practice
Real-world examples.
Example
A clean-energy start-up with $2,000,000 in annual sales wants to give early investors a way to sell shares. It has been filing reports with the regulator, so it applies to be quoted on OTCQB. The listing lets shareholders trade without the cost of a major exchange, and the founders gain a way to value any shares they later use to pay staff or acquire smaller businesses.
Example
A fund manager scans OTCQB companies for early-stage firms that publish regular reports. She uses the tier as a first filter, then reads each company's accounts closely before investing, paying special attention to cash on hand and the plan for funding the next twelve months. The filter saves time, but does not replace her own research.
Example
A foreign technology company wants US investors to be able to buy its shares. It qualifies for quotation on the venture tier and appoints a US contact. Over time, its investor base broadens, and the company's finance team reports the shareholder register by country each quarter to track the change.
Case study
Seen in the real world.
Meadowlark Analytics is a fictional data company, and this is an illustrative story. After three years of private funding, the founders wanted to broaden their shareholder base and give early investors liquidity.
They compared a national exchange listing, which would have cost far more in fees and compliance, with quotation on OTCQB. The finance director estimated that the annual cost of the venture tier, including audit and reporting, was about $150,000, compared with several times that for an exchange listing.
The company chose OTCQB, built a record of timely reporting and, after revenue reached $12,000,000, applied for a higher tier. The illustrative lesson is that a middle tier can offer a proportionate step between private life and a full listing. The board also noted that the annual reporting routine brought the finance team's month-end close forward by three working days.
Watch out
Common mistakes.
- Treating OTCQB as equivalent to a national exchange, when its standards and oversight are lighter.
- Assuming quotation on the tier means a company is profitable, when many of its companies are early-stage and loss-making.
- Ignoring trading volume, when thin trading can make it hard to buy or sell without moving the price.
Questions
People also ask.
Does quotation on OTCQB mean a company is approved by the securities regulator?
No, the market operator sets the tier's standards, and the regulator does not endorse or review the quality of the company.
Can a company move from OTCQB to a higher tier?
Yes, a company that meets the higher standards can apply to move up, and one that fails to meet the standards can be moved down, so the tier is a status that must be maintained each year.
Is OTCQB a regulated stock exchange?
No, it is a quotation market operated by a private company, though the securities themselves are subject to the securities laws.
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